Fed EVP: Observations on Global Economy, Financial System
At a recent meeting of the Institute of International Finance, U.S. Federal Reserve Bank of NY executive vice president of International Affairs group, Terrance J. Checki said in a prepared speech that the mood in global markets has improved quite a bit since the middle of last year: stocks are up, spreads are down, volatility is lower, and capital market activity has picked up. A big part of that reflects recent success in averting tail risks that were weighing on investor confidence.
Checki noted that Europe’s common currency hasn’t fragmented, the U.S. didn’t go over its fiscal cliff, and China hasn’t had a hard landing.
But in each of these cases, there is plenty of unfinished business, and important challenges remain.
In the euro area, Checki said that while there are grounds for cautious optimism, much remains to be done to restore confidence and growth. Fiscal adjustment is far from complete and is likely to continue to weigh on growth for some time to come. Financial conditions in the periphery have improved, but remain much less supportive than in the core. Plans to build a banking union and deepen economic, fiscal and political integration remain very much works in progress. And, as the elections in Italy have reminded us, there is an important political counterpart to the economic and financial challenges and risks confronting the region.
In the U.S., we are only part way toward addressing our fiscal challenges. Recent measures are chipping away at the deficit, but the approach hardly corresponds to anybody’s ideal of efficiency. While there is little mystery about what ultimately needs to be done, we simply have not yet mustered the political will to make the compromises needed to get there, Checki noted.
And, unfortunately, with deadlines comingand one just having passed for decisions on mandatory spending cuts and spending and borrowing authorizations — we can’t be comfortable that this is going to go smoothly.
Finally, in China, while the policy cycle has turned and the economy appears to have reaccelerated, the authorities there will need to continue to deal with new challenges, including rapid growth in non-bank finance, increased leverage across the economy, and maintaining equilibrium in the midst of rapid structural change and increasing complexity.
To read the full text of Terrance Checki speech before the IIF, click here.